The U.S. virtual goods market will jump 60% this year to $1.6 billion, and analysts estimate worldwide annual revenue could reach $10 billion — the equivalent of Hollywood’s 2009 box-office earnings. Founder of online-gaming firm Ohai, Susan Wu knew that virtual goods (products that exist only online) made real money, and she went after the digital wares like a hot commodity.

The U.S. virtual goods market will jump 60% this year to $1.6 billion, and analysts estimate worldwide annual revenue could reach $10 billion — the equivalent of Hollywood’s 2009 box-office earnings. Founder of online-gaming firm Ohai Susan Wu knew that virtual goods (products that exist only online) made real money, and she went after the digital wares like a hot commodity. Yet this multi-billion-dollar industry is still a niche market according to experts, and Wu, a venture capitalist who’s had her hands in companies like Conduit Labs and Twitter, aims to take the virtual economy to the next level. –Austin Carr

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Fast Company: What are you working on at Ohai?

Susan Wu: We’re trying to do for massively multiplayer online games what the iPhone did for smart phones and what the Wii did for consoles. We are basically building the world’s first MMOs for social networks, and we just launched our first one into an open-beta, but we’re building six to eight of these games per year. If you think of the success that social gaming has had in the last year, with FarmVille reaching 80 million users, that’s super exciting. But even those social games are still only monetizing at $1 to $2 a year per user, whereas massively multiplayer games like World of Warcraft have been able to monetize at $100 or $120 per user. We’re trying to bring those richer gaming experiences to the mass market audience, and to show the people playing FarmVille that there’s a much larger world for interactive entertainment.

FC: So virtual goods are very profitable then?

SW: Absolutely. They’re a much more efficient monetization engine than advertising and often, in many cases, subscriptions. The marginal cost of copying additional bits from one
database to another is near zero. It can get up to 90% gross margins on
the goods you sell. Tencent, China’s largest social network, does $1 billion or $2 billion a year in revenue, and almost all of that comes from virtual goods. One of the largest free-to-play MMO companies in the world, Nexon, builds online games, such as a go-kart game, where you race around in virtual go-karts, and they sell custom-branded versions of that go-kart for $10; they’ll sell engines that make your car quicker or run differently for a few dollars.

SW: One major reason is the entertainment value — you’re consuming services. It’s the same reason you’re willing to pay $15 for a movie ticket in New York City, and then buy the $10 carton of popcorn and the $5 Coke. When I play World of Warcraft, I’m investing 30 hours a week into this game. Of course I’m going to be super invested in my character, and I’m going to care about my entertainment value and my experience. So spending that $2 or $3 on a good that might enhance those 30 hours I’m already playing makes a lot of sense.

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But some of these goods you buy are also quite functional, meaning they unlock different features. For example, some games charge you $1 or $2 to access different areas. That’s essentially a virtual goods transaction. The third reason is relationship-based. You might care quite a bit about your social relationships with other players in these worlds and in these games, and because of that, be willing to spend a dollar on a gift.

FC: And how is Ohai’s MMO coming along?

SW: We finished our alpha-test a few weeks ago. Your average MMO like World of Warcraft is maybe 16% female, 84% male. I’m super-psyched to say in our alpha-test we were able to get to about 50% male, 50% female, and 70% of our most active players were women. So that’s super cool, and proves a good data point that you can build MMOs to a much broader audience. And so far, in our monetization test, the average transaction size has been about $16.50, and we had one player spend $600 in the first 30 days of our alpha-test, which is pretty exciting. So there’s definitely proof that there’s entire new generations of social games that are going to be coming to market that will transform how people think about playing with each other online.

About the author

Austin Carr writes about design and technology for Fast Company magazine.